Liberal Think Tank Urges Property Tax Relief – But Only to Those Most in Need

Mark J. Magyar | September 6, 2013 | More Issues
New Jersey Policy Perspective proposal emphasizes tax equity in property tax plan

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A liberal public policy institute weighed in yesterday with a proposal to provide property tax relief to those who need it most by providing property tax cuts only to those whose property tax payments exceed a set percentage of their income.

David Rousseau, New Jersey Policy Perspective’s budget analyst who served as state treasurer under former Democratic Gov. Jon Corzine, yesterday urged that New Jersey consolidate all of its existing property tax relief programs into a “circuit breaker” strategy that would provide property tax relief only to those who are most in need.

“For four decades, candidates have promised New Jersey homeowners property tax relief. And for just as long, property tax bills have risen to crush the budgets of families least able to afford them,” NJPP President Gordon MacInnes said, emphasizing the need for property tax reform to be based on principles of tax equity and ability to pay.

“The ‘circuit breaker’ idea goes back to the original debates on the income tax [in 1976], and it’s the right thing to do, but it’s harder to do politically,” Rousseau acknowledged. “Political leaders always want to give tax relief to everybody,” rather than put together a more limited program that provides tax relief only to those who really need it, he said.

NJPP’s emphasis on tax equity and the concept of limiting property tax relief only to those whose property taxes exceed a certain percentage of their income is a far different approach from other recent property tax cut plans, noted Marc Pfeiffer, assistant director of the Local Government Research Center at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy.

In 2012, Senate President Stephen Sweeney (D-Gloucester) proposed a property tax cut up to $1,000 on the first $10,000 in property taxes for those earning up to $400,000 — a plan that Republican Gov. Chris Christie later endorsed. Assembly Majority Leader Lou Greenwald (D-Camden) proposed a cut of up to $2,000 on the first $10,000 in property taxes for those making up to $250,000, a more ambitious plan funded partly by a “millionaire’s tax,” which Christie opposed. Neither Christie nor Sen. Barbara Buono (D-Middlesex), his Democratic opponent, responded to requests for comment on NJPP’s proposal yesterday.

Both the Sweeney and Greenwald plans would have provided property tax relief to the overwhelming majority of New Jersey residents. “You have to provide broad property tax relief in the suburbs if you’re going to create legislative buy-in and public support,” said William Schluter, a former Republican state senator from Hunterdon County who has been a leading proponent of property tax reform.

In June, the New Jersey State League of Municipalities Property Tax Reform Task Force laid out an option for a 35 percent property tax cut of up to $7,000 on the first $20,000 in property taxes for all homeowners to be paid for by combining all existing property tax relief programs and by shifting $3.9 billion of the current $20 billion residential property tax burden to the state income tax. That plan was designed to rebalance New Jersey’s tax system — under which citizens pay more in property taxes than all state taxes combined — and to make New Jersey’s residential real estate market more competitive.

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All of these proposals, MacInnes noted, did not specifically target the regressiveness of New Jersey’s property tax system, which hits poorer residents hardest. Not only does New Jersey have the highest property taxes in the nation overall, but three urban New Jersey counties — Passaic, Essex and Union — ranked highest in the nation in the percentage of income their residents pay in property taxes, according to the most recent Tax Foundation study.

“New Jersey Policy Perspective is all about tax equity, and the ‘circuit breaker’ is a very reasonable tool to achieve the public policy goal of providing property tax relief to those who need it,” said Pfeiffer. “But it’s a very flexible tool, and you can tailor it to make it more or less progressive, and to whatever level of funding you have available.”

While neither Rousseau nor Pfeiffer knew of a state that used the circuit breaker concept to provide property tax relief, Pfeiffer noted that “the idea has been kicking around in New Jersey academic and tax policy circles for years.”

Former Gov. Jim Florio used the circuit breaker idea in his property tax rebate program in the early 1990s when he incorporated both income taxes and property taxes paid by homeowners in calculating homestead rebates, Rousseau noted.

Henry Coleman, Florio’s tax policy adviser who serves as a professor at Rutgers University’s Bloustein School, remains the state’s foremost advocate of the circuit breaker concept, suggesting in an interview with NJ Spotlight last spring that the best approach would be for the state to provide rebates to citizens who pay above a certain percentage of their income in total taxes — including property, income, and sales taxes — because it is the total tax bill, not a specific bill, that counts.

Rousseau’s report, “Why Significant, Lasting Property Tax Reform Is So Difficult: Analyzing the League of Municipalities’ Property Tax Plan,” noted that the average New Jersey family pays about $8,000 – or 10 percent of its annual income – in property taxes, but only about $1,200 – or 1.5 percent of its income – in state income taxes.

“The big reason property tax reform is difficult is the sheer scale of the taxes involved. With over $20 billion in residential property taxes paid in 2012, $5 billion is needed to provide a really noticeable 25 percent reduction,” Rousseau wrote, and a tax shift of that level cannot be accomplished without major increases in income or sales taxes or both.

As a result, he noted, “the undertone at the forum held to present the [League Property Tax Reform Task Force’s] proposal was pessimism that the governor and legislature would pass such a sweeping change and near-agreement that a constitutional convention would be needed to make such bold reforms to New Jersey’s tax structure. The fact that the League proposal was dead on arrival confirms how hard it is to truly reform to the property tax structure, rather than provide limited relief within the existing framework.”

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Rousseau’s report laid out a series of principles for enactment of a circuit breaker approach to property tax relief, but stopped short of laying out a specific plan for rebates to kick in once a specified percentage of income is paid out in property taxes.

The former treasurer said the level of property taxes as a percentage of income should be set to benefit taxpayers that are the most overburdened, and that homeowners falling below that threshold should receive no benefit because they do not meet the “overburdened” definition. “If 35 percent, for example, meet the threshold, they should receive the benefit, and the 65 percent who do not should not,” Rousseau said. “It’s hard for politicians to get beyond, ‘What does this mean for my district?’ But you need to draw the line.”

He also recommended using real income, not taxable income, so that senior citizens, who often have large amounts of untaxed income, and nonseniors are treated the same, and setting a maximum income level for eligibility for the benefit.

Like the League’s Property Tax Reform Task Force, he recommended paying for the new tax relief program by using a constitutionally dedicated income tax increase to pay for the program because the increased income tax payments can be deducted from federal income taxes, and by rolling all current property tax relief programs into the new initiative.

He also agreed with the task force that the benefit should be delivered as a direct reduction in property tax bills, not as an income tax credit that would require homeowners to wait up to a year to receive the benefit, and that the property tax benefit should be incorporated into mortgage companies’ calculations of escrow accounts,

Eatontown Mayor Gerald Tarantolo, chair of the League of Municipalities Property Tax Reform Task Force, said the group would analyze Rousseau’s report when it reconvenes a few weeks from now.

Rousseau’s report analyzed the League Property Tax Reform Task Force’s proposal, and noted that while the plan was designed to be revenue-neutral within income groups, it is hard to assess how many “winners and losers” there would be within each income group because individual state income tax records cannot be matched up with individual property tax records.

Rousseau, like other analysts, noted that the league’s proposal to tax all income at the level of the highest bracket, rather than simply increasing the current graduated income tax brackets by 30 percent each, would create “jagged” tax spikes between brackets. He pointed out that the “way to avoid dramatic tax increases in this kind of structure would be to add more brackets to smooth out the percentage increases as incomes rise so that the relief is more equitably distributed.”